BACKGROUND
The U.S. government is Monetarily Sovereign, meaning it:
1. Created the first U.S. dollars from thin air, by creating laws from thin air. It arbitrarily created as many dollars as it wished and gave them the value it wished.
2. Never can run short of its own sovereign currency, the U.S. dollar. Even if it collected zero taxes or had no other form of income, it still could continue spending forever.
3. By arbitrarily changing laws, the government has absolute control over the relative value of the dollar, a value it arbitrarily has changed many times over the years.
Monetarily non-sovereign governments like state/local governments and euro currency governments do not have the above powers.
These governments resemble you, me, and businesses in that we all require some form of income in order to spend.
There are, however, Monetarily Sovereign governments whose credit history does not allow them to freely exercise power #3. above.
Consider, for instance, Argentina, which in the past century, as suffered from hyperinflation caused by extremely bad management, combined with the fact that they are a minor player in the currency-exchange markets.
Argentina finally was able to solve its hyperinflation by pegging its peso to the U.S. dollar. But, pegging the peso to the dollar requires that Argentina maintain a supply of U.S. dollars, which it buys on the open market, as collateral for its debts.
When its debts exceed its supply of dollars, it is unable to maintain its collateral,
Creditors then make demands that can’t be met or refuse to provide goods and services in exchange for pesos.
Covid-19, The Coming Developing Country Debt Crisis and The Argentina Debt Reduction Proposal
Posted on April 30, 2020 by Yves Smith
Yves here. By Jayati Ghosh, Professor of Economics, Jawaharlal Nehru University. Originally published at the Institute for New Economic Thinking websiteAs the United Nations warns that the “Great Lockdown” threatens to become the “Great Meltdown”, it’s now clear that most sovereign debt of developing countries is simply unpayable.
Even before the Covid-19 pandemic, total public and private debt in developing countries was nearly double their GDP. External short-term debt is a real problem: as much as $1.62 trillion is due to be repaid by developing countries this year, with another $1.08 trillion due in 2021.
All Monetarily Sovereign nations, even small ones with bad credit history, easily can pay internal debt, simply by creating their own sovereign currency. (Monetarily non-sovereign nations raise taxes which recirculate to the populace.)
Only external debt can be a problem if that debt is owed in a foreign currency.
(Argentina’s debt) would have been a struggle before; now, the Covid-19 crisis makes it impossible.
Developing countries are being battered by a tsunami of falling export and tourism revenues and dramatic outflows of capital, causing sharp currency depreciation.
Without quick and substantial action, many governments will be forced into debt defaults.
So does the international community want a perfect storm of disorderly defaults that could wreck the global financial system?
Or a more equitable distribution of costs among lenders and borrowers, with less damage to people?
The UN has argued for a new “Global Debt Deal” for developing countries, involving a $1 trillion debt write-off, recognizing that this is one of those unusual moments in history when the fate of the international system hangs in the balance.
As usual, the UN is intentionally or unintentionally clueless about international finance.
A mere $1 trillion debt write-off would be like taking a bucket of water from the ocean, hoping to reduce the tide.
But the concept is good. Monetarily Sovereign governments, and especially a powerhouse like the U.S. can afford unlimited debt writeoffs.
The new government in Argentina has proposed a set of principles and a framework for debt sustainability that make eminent sense. If adopted by creditors, it would set the stage for a manageable debt reduction in Argentina that would enable the country to grow its way out of the currently unsustainable debt.
It would also provide a template for dealing with other unsustainable developing country debt.
A brief history first. (To deal with its hyperinflation, Argentina called in the International Monetary Fund (IMF), which provided a controversial bailout with its usual conditions—massive budget cuts, primary budget balance in 2019 and a reduction of the external deficit.
Argentina did everything the Fund asked for, and the economy got steadily worse. Growth had collapsed well before the pandemic, inflation is surging, and there is immense hardship among people.
The IMF is the world’s loan shark. Like the typical loan shark, it provides money along with onerous conditions that are guaranteed to further impoverish the borrowing nations.
“Massive budget cuts, a balanced budget, and a reduction of external debt” are known together as “austerity,” which always causes a financial disaster ore exacerbates an existing disaster.
As such, austerity is a favorite of the rich, because it creates a needy and beholden public, willing and desperate to labor at difficult jobs for minimal wages — in short, a helpless slave class.
One is reminded of the onerous financial conditions the Allies placed on Germany after WWI, which only 25 years later led to WWII.
Argentina is offering to restructure $65 billion of foreign debt to bondholders, under which interest payments would resume in 2023 and principal payments in 2026.
While some creditor groups rejected the offer, the negotiations continue.
Creditors who want to be paid at all should recognize that they have to take a haircut now.
Asking the private sector to “take a haircut” for public sector debt is bad economics, especially when there exists a primary creditor that has no need for repayment, and can take endless “haircuts” without suffering a burden.
The U.S. government, for instance, neither needs nor has any use for debt repayment. Any dollars received would cease to exist. The federal government very simply destroys all income it receives.
In the case of a nation that has pegged its currency to the U.S. dollar, and has more debt than dollars, the U.S. should supply the needed dollars. No strings.
Other than that, the U.S. should simply give dollars, on a per capita basis, to every nation meeting certain criteria, for example, a democratically elected government, a government with, or in danger of, impoverishment, or a friendly nation.
It would be similar to a “Marshall Plan” for the COVID-19 virus:
The Marshall Plan: Following WWII, some of the leading industrial and cultural centers of Great Britain, France, Germany, Italy, and Belgium, had been destroyed.
Some regions of the continent were on the brink of famine because agricultural and other food production had been disrupted by the fighting.
In addition, the region’s transportation infrastructure – railways, roads, bridges, and ports – had suffered extensive damage during airstrikes, and the shipping fleets of many countries had been sunk.
Aid was distributed to 16 European nations, including Britain, France, Belgium, the Netherlands, West Germany, and Norway, essentially on a per capita basis.
The countries that received funds under the plan didn’t have to repay the United States, as the monies were awarded in the form of grants.
Note that when the Marshall Plan was instituted, the U.S. was somewhat less than Monetarily Sovereign, as it still was on a gold standard. This limited the amount of money the U.S. could afford to give.
Today, no such limitation exists, and the U.S. easily can afford to support not only our own states, counties, cities, businesses, and citizens, but also other nations.
Such aid easily is affordable, and it would come back to us as prosperity by preventing a virus-induced world-wide depression and its economic devastation.
A COVID-19 “Marshall Plan” for Americans and for the world would truly make America “great again” and restore us to that “shining city on a hill” we always imagine ourselves to be.
Rodger Malcolm Mitchell
Monetary Sovereignty
Twitter: @rodgermitchell
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THE SOLE PURPOSE OF GOVERNMENT IS TO IMPROVE AND PROTECT THE LIVES OF THE PEOPLE.
The most important problems in economics involve:
- Monetary Sovereignty describes money creation and destruction.
- Gap Psychology describes the common desire to distance oneself from those “below” in any socio-economic ranking, and to come nearer those “above.” The socio-economic distance is referred to as “The Gap.”
Wide Gaps negatively affect poverty, health and longevity, education, housing, law and crime, war, leadership, ownership, bigotry, supply and demand, taxation, GDP, international relations, scientific advancement, the environment, human motivation and well-being, and virtually every other issue in economics.
Implementation of Monetary Sovereignty and The Ten Steps To Prosperity can grow the economy and narrow the Gaps:
Ten Steps To Prosperity:
2. Federally funded Medicare — parts A, B & D, plus long-term care — for everyone
3. Provide a monthly economic bonus to every man, woman and child in America (similar to social security for all)
4. Free education (including post-grad) for everyone
5. Salary for attending school
6. Eliminate federal taxes on business
7. Increase the standard income tax deduction, annually.
8. Tax the very rich (the “.1%”) more, with higher progressive tax rates on all forms of income.
9. Federal ownership of all banks
10. Increase federal spending on the myriad initiatives that benefit America’s 99.9%
The Ten Steps will grow the economy and narrow the income/wealth/power Gap between the rich and the rest.
MONETARY SOVEREIGNTY
#Monetary Sovereignty - Mitchell 